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April 4, 2014

7 Deadly Sins of Multi-Asset Investing: Aberdeen

The asset manager shares some cautionary tales for today’s investors

Aberdeen Asset Management is on a quest to help investors resist “the siren call of short-term opportunity.”

Short-term investing, the group says, often is unproductive and stems from “bad habits” linked to “behavioral traps and temptations,” the group said in its report “The Seven Deadly Sins of Multi-Asset Investing.”

The group doesn’t aim to make Catholic and other investors feel guilty about their less-than-stellar investing habits, just more self-aware and able to “resist them.”

“We hope our take on sin is a fun but useful insight into the way we think about the world and multi-asset investing,” said Mike Turner, head of multi-asset for Aberdeen Asset Management, in the piece.

“Investing for the long term sounds like an obvious strategy, but it is surprising how few investors actually adopt it. In our fast-paced world, the desire for instant gratification can overwhelm,” the group explained.

The prospect of immediate gain or desire to jump into the latest hot stocks or sectors can prove harmful, since these strategies frequently are followed “long after the opportunity to profit has passed,” Aberdeen says.

“A less lusty approach that weathers market ups and downs over years, not just weeks, almost always proves more fruitful — as well as cheaper — in the long term,” Turner said.

2. Gluttony (Information Overload)

Don’t get lost or overwhelmed by information and analysis being thrown at investors online, on TV and radio, and in print.

“Simpler but disciplined analytical frameworks can be the most robust,” Turner said.

When evaluating asset classes, it’s best to look at yields and growth prospects.

“If valuations are high (and therefore yields are low), the chances are that valuations will fall (and therefore yields will rise),” he said. “Conversely, if yields are high, there’s a good chance that they will fall and valuations rise.”

Muster the discipline to screen out “market noise,” which few did during the dot-com bubble, when many investors chose to count eyeballs, instead of looking closely at company cash flow.

“When it comes to information, less is very often more,” Aberdeen stressed.

3. Greed (Following the Herd)

“Whether it’s equities, bonds or property, the avarice of the herd is always to be treated with caution,” the group explained.

When investors are piling in to a stock or sector, it’s good to steer clear or even sell. At the same time, when there is market agitation or investor rejection, this may “provide rich territory for smart, selective investors who know what they want to buy and why.”

Equal discipline also is required when it comes to keeping portfolios balanced.

“If everyone is moving to equities, it can be tempting to sacrifice your fixed-income exposure. But with that, you could also jettison your risk diversification,” the investment group said.

4. Sloth (Neglecting Due Diligence)

There are no shortcuts when it comes to successful, well-planned investing.

“In fundamental equity investing, that means doing all the hard work to get to understand every single company first hand — finding out where performance is coming from and how it can be sustained in the future,” Aberdeen explained in its report.

There’s lots of homework to do when buying bonds, too, of course.

“Only through this grunt work do we really understand what the right valuation for an investment should be,” Turner wrote.

Overall, the moral is not to be lazy in doing due diligence, the group says, and to “rest comfortably once a sound long-term decision has been made.”

A properly diversified portfolio can allow you to feel like you’re in “an oasis of calm.”

When equities fall, fixed-income holding should be stable, for instance.

“Allocating to the highest-quality assets you can find across a spread of lowly-correlated asset classes remains arguably the most sensible protection,” the group noted. “Being diversified is the key to calm — even in volatile markets.

5. Wrath (Slavery to Benchmarks)

Tracking or bugging a benchmark is “a cardinal sin of the ‘active’ investor,” Turner points out.

“The sin with this approach is partly that it’s lazy and unthinking. It means you are constantly investing only in assets that have done well in the past, rather than those that might do well in the future (stocks only enter indices following good performance and leave after poor),” the Aberdeen report noted.

Instead, consider investing in assets that offer potential for future return at the “appropriate level of risk.”

Modern multi-asset strategies, the group explains, focus on measuring themselves against “the tangible and absolute concept of a risk-free return,” which is a benchmark well worth outperforming for many investors.

6. Envy (Overconfidence)

Being overconfident can prove fatal for investors, since it causes them to make the same mistakes over and over.

Plus, strong feelings of overconfidence tend to come before a fall, as in the dot-com bust.

“Whatever your assessment of your own confidence, spending more time asking yourself why your judgement could be wrong, rather than gathering proof that it is right, can lead to a better outcome.”

7. Pride (Overreliance on Instinct)

Instinct and emotion easily override sense and logic when it comes to investing.

To be a “virtuous” investor requires that you “resist impulsive behavior, screen out market noise, remain thorough in your research and stay calm and dispassionate whatever market conditions you face,” Aberdeen argues.

Armed with the knowledge of which vices to avoid, good habits should now become at least somewhat easier to cultivate.

Want to review the seven deadly sins? Go through the “investment sin” checklist: